With stocks range bound, traders await the Fed's latest message on normalizing policy, after nine years of no interest rate hikes.

The Fed holds its June meeting on Tuesday and Wednesday and is not expected to take action when it releases its statement Wednesday afternoon.

But traders anticipate that Fed Chair Janet Yellen will have a message for markets when she holds a briefing after the meeting, and they will be looking for clues on whether the Fed would be ready to embark on its first rate hike in September, as many expect.

Art Cashin warned on Wednesday that a self-fulfilling prophecy could take hold in bond markets, causing yields to spiral out of the Federal Reserve's control.

Treasurys were on the back foot Wednesday as a rise in the benchmark 10-year German bund yield kept pressure on the U.S. bond market.

The 10-year Treasury yield, which moves in the opposite direction of the price, rose to a new eight-month high of around 2.49 percent before trading near 2.48 percent, as bund yields pushed above 1 percent for the first time since last September.

"If the yields move up and people who are in bond funds and other places begin to get nervous and they start to redeem their shares in those bond funds, that may force bonds to liquidate even more and thereby push yields even higher," Cashin told CNBC's "Squawk Alley."

"While the Fed is talking about being measured and data dependent, they're potentially playing with fire here because they could start spontaneous combustion that they can't control," UBS' director of floor operations at the NYSE said. (Tweet This)

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The Fed has held interest rates near zero since December 2008. It is widely expected to raise interest rates in 25-basis-point increments, perhaps as early as this year.

Government bonds in both Europe and the U.S. have come under heavy selling pressure over the past week amid a growing perception that a pickup in economic activity and inflation means that ultralow debt yields are no longer justified.

The United States is unlikely to see another taper tantrum as bond yields normalize, but German fixed income is looking scary and could impact U.S. markets, Princeton Securities' Ben Willis said Wednesday.

"The risk to the equities market is in the fixed income market, and that rattle that we saw happen in Germany can very well affect us," Willis told CNBC's "Squawk on the Street." "It's the way it happened, it's the volatility and the swiftness of the move that should scare investors who are in fixed income right now, saying, 'Should I really be here?'"

Asked when and how quickly U.S. Treasury yields could reach levels that ring alarm bells for equities, the senior floor broker said it has become difficult to use a traditional matrix to answer that question in the face of distortions due to interventionist central bank monetary policy.

"The bubble that was created by the central banks, their attempt right now is to deflate it without it popping," he said. "Rising interest rates, when they're allowed to raise normally, are a function of a healthy market and a healthy economy, and that should be a sign to buy equities, not to sell them."

Willis noted that players in the equity markets continue to focus on a few specific sectors: financials, energy and consumer discretionary. Investors are also buying into mid-cap stocks, he added.

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The Russell 2000 is up 5 percent year to date, compared with a 2.2 percent rise in the S&P 500.

The S&P 500 is pushing up against the high end of its range at 2,106, but Willis noted financials are one of the few sectors that have seen market activity while the broad market remains quiet.

Banks have benefited from the perception that they'll be able to profit on deposit-based business once the Fed raises rates, said Willis, and on "the anticipation that banks will become banks again, not arbitrage for the Fed."

While world equity markets have marched to the beats of their own drummers, there has been a seismic shift in the tectonic movements shaping global bond markets in recent weeks.
On Wednesday, global interest rates, almost in unison, hit their highest levels of 2015 and, in some cases, the highest levels in about nine months.

Of course, there are a few interpretations of what may be occurring, as with the case with any sudden market movement. But, increasingly, it appears that global yields are telling us that the threat of deflation is receding, and receding more rapidly than many, myself included, would have expected.

After having fallen to their lowest levels in modern history, to just above zero, the yield on the 10-year German bund topped 1 percent this week. While that remains low by historical standards, the speed with which yields have climbed has been breathtaking, especially in a world that is still fretting about a potential Greek debt default, and exit from the euro zone, weakening growth in China, recessions in Russia and Brazil, and uneven economic indicators here at home.

Against that backdrop, however, Germany is not alone in witnessing a rapid rise in yields. U.S. 10-year Treasury yields flirted with 2.5 percent this week, also the highest of 2015.

Is it possible that deflation, as an existential economic threat to the global economy, is dead?

It is.

First, it is important to examine all aspects of the recent rise in rates. Unconventional monetary policies, which began in the U.S., at the very depths of the financial crisis, are now being used conventionally, one might argue, almost everywhere in the developed world. Roughly 80 percent of official global rates are at, or near zero, and bond-buying programs are in vogue from Belgium to Beijing.

The massive influx of, not just domestic, but global, liquidity has halted the slide in prices in the U.S., Europe and, to a lesser extent, Japan. In addition, asset inflation is either evident, or running rampant, depending on where in the world you look.

From my vantage point, the biggest divergence between growth, economic inflation, and asset prices is in China, which still has deflationary tendencies, is massive industrial and residential overcapacity and larger internalized debt burdens than many casual observers realize.

If there is one place where government policy has led only to asset-price increases, as opposed to a resumption of growth, it is in China, which merits the most attention in that regard.

Elsewhere in the world, however, the data are beginning to look more positive and increasingly aligned with the idea of economic normalization."Green shoots" have sprouted in the euro zone, Greece notwithstanding, while the Japanese economy has begun to move forward. Meanwhile, U.S. job growth, along with key wage measures, like the Employment Cost Index, have moved to levels not seen since the Fed last raised interest rates over a decade ago.

To be sure, the historic volatility in bond yields could be attributed to an increasing lack of liquidity in the global bond markets, as central banks buy more and more of their home country's debt, resulting in a shortage of bonds. The net effect is that it takes smaller volumes of bond trades to cause greater price swings in the market.

It's a condition that Blackstone CEO Steve Schwarzman, among others, recently opined could be the cause of the next financial crisis.

That, of course, remains to be seen, and is identified more with regulatory burdens on banks than with extraordinarily accommodative monetary policies.

Indeed, after having fallen to historic lows, this rebound in rates could merely (and I use the term "merely," advisedly), be an upward correction in an ongoing, secular bear market in yields.

But, the data are supporting the upward move. Inflation in Europe has turned up after falling into negative territory over the last several months. Oil has reversed course while other commodity prices have stopped going down, which, no doubt, will put upward pressure on headline inflation measures.

So-called "Treasury break-evens," a measure of inflation expectations, have risen recently, suggesting that the "bond vigilantes" are getting a whiff of reflation, if not, a modest, and positive, increase in inflation itself.

In short, the expansionist monetary policies of global central banks may well be working to rid the land of the scourge of deflation. And while reports of deflation's death may be premature, it seems the message of global bond markets is that we should at least be preparing its funeral rites.

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He is also editor of "Insana's Market Intellgence," available at Marketfy.com. Follow him on Twitter @rinsana.

Investors have had to quickly get used to the recent spurt of market volatility and, with few assets offering safe haven from the rout, investors are eyeing the vulnerable bond sector for direction.

The Pimco Total Return Fund, one of the world's largest bond funds, slashed its holdings in U.S. government debt last month, according to data published on Tuesday.

An employee views trading screens at the offices of Panmure Gordon and Co in London, England

The group cut its U.S. Treasury exposure to just 8.5 percent of assets in May, just ahead of the sell-off seen in June, sharply down from the 23.4 percent levels seen in April.

The fund, with some $107 billion in assets, is now managed by Scott Maher, Mark Kiesel and Mihir Worah after the departure of high-profile fund manager Bill Gross in September.

U.S. government bonds are selling off -- which is sending yields higher as they move inversely to price -- as part of a global bond rout that was started back in April by a slump in German yields in April. Also contributing is the relatively good economic data coming out of the U.S. Jobs numbers beat analysts' expectations last week, upping expectations that the Federal Reserve will hike interest rates this year.

A fresh wave of selling gripped global markets on Wednesday, with yield on the 10-year German government bond yield hitting 1 percent level for the first time since September after the European Central Bank's preferred inflation expectations gauge peaked to a 3-week high. The yield has soared from a record low close of 0.073 percent in April.

The largest independent asset manager in Europe, Carmignac Gestion, is also taking profits in the government fixed income space, cutting exposure to peripheral debt and boosting short positions, or bets that yields will rise further on core German and U.S. bonds.

In the group's investment update for June Didier Saint-Georges, a member of the Carmignac's investment committee, said the prospect of resurgent inflation could complicate the Fed's goal of gradually normalizing its monetary policy, presenting a risk to fixed income markets that will have to be "actively managed".

"Against a macroeconomic backdrop where uncertainty surrounding inflation is becoming more of a concern than growth, managing our bond investments flexibility will be essential," Didier Saint-Georges said, who helps oversee around 60 billion euros ($67 billion) in assets under management.

"We are now factoring the Federal Reserve's reaction function into our strategy and expect the US yield curve to flatten. We are maintaining our corporate bond positions, mainly in the European financial sector," he added.

Analysts at Societe Generale are also recommending clients to short the U.S. Treasury for the second half of the year, on expectations that the yield on the 10-year will rise 25 basis points by the end of 2015.

"Treasurys remain exposed as the U.S. soft patch comes to an end and global growth forecasts finally find their feet. But a 1994-type bond crash is not around the corner just yet," said rates & forex strategy at the bank, Vincent Chaigneau in a note to clients published Wednesday.

However, Chaigneau is not convinced European government bond yields will continue to push higher throughout the year.

"The euro bond sell-off is a buying opportunity over summer, but not beyond that," he added.

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